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Will only small fish fry for the ‘London Whale’ fraud?

On Behalf of | Sep 27, 2013 | Fraud

The “London Whale” is a nickname for a trader for JPMorgan Chase & Co.’s Chief Investment Office in London who was known for his enormous wagers on credit derivatives. The London Whale refers to allegations that certain people at the London office improperly valued those derivatives in an effort to hide the full extent of the bank’s losses from investors and regulators — losses now estimated at $6 billion.

The SEC recently settled, for $920 million, a civil enforcement suit brought against the bank for failing to properly monitor itself and detect the fraud. A grand jury recently indicted two men from the London office for conspiracy, securities and wire fraud, making false entries in bank records, and making false statements to the SEC. The SEC has also filed a second criminal case against the two men.

The London Whale himself has not been charged, as federal prosecutors are relying on his testimony to prosecute the other two men.

Details of the $920-million SEC settlement were just released, and apparently no charges will be brought against anyone among the bank’s senior management. That fact has been held up as proof that the wealthy and powerful can easily scapegoat their underlings and pay for their wrongdoing with relatively paltry fines.

A law professor who writes for the New York Times’ DealBook blog, however, hesitates to draw that conclusion, while admitting it’s disquieting that some people face criminal charges and others mere civil fines for similar behavior. As you move up such as colossal corporate ladder, he reminds us, it can be ever more challenging to prove any individual was involved enough to have specific criminal intent.

JPMorgan itself could have been charged, as organizations are legally responsible for crimes done on its behalf and for their benefit. Yet, as the professor points out, when everyone is held responsible, it’s hard any particular individual is.

In its civil settlement, JPMorgan admitted what the SEC’s co-director of enforcement called “egregious breakdowns in controls and governance” which put shareholders at risk and resulted in inaccurate regulatory filings.

In a huge, allegedly systemic fraud like the one alleged here, decisions must be made about the most effective government response, and those decisions, by law, are left up to prosecutors. If they aren’t precisely transparent about the basis for those decisions, it is often to meant protect the reputations of the innocent.

Sources:

  • The New York Times’ DealBook blog, “On JPMorgan and What Makes a Criminal Case,” Peter J. Henning, Sept. 23, 2013
  • The New York Times’ MoneyBeat blog, “London Whale Story Grows,” Julie Steinberg, Sept. 26, 2013